The last two articles the author wrote, Dealing with Proposed Regs under the SECURE Act and Strategy Under the SECURE Act, examined certain strategic issues that CPAs may need to explain to their clients. This article assumes the reader knows those concepts as a base and complements those ideas with planning for long-term second marriages and for trying to minimize fiduciary income tax on IRAs held in trust without necessarily getting IRA distributions out of trust. 

Planning for Long-Term Second (or Subsequent) Marriages

For a long-term second (or subsequent) marriage, consider using a conduit marital trust as the beneficiary of the decedent’s IRA. Here, the grantor cares more about supporting the surviving spouse than ensuring the IRA goes to the children from the first marriage. However, if the surviving spouse doesn’t spend the whole IRA, the children from the first marriage get whatever remains. If the grantor left the IRA outright to the surviving spouse and the surviving spouse died prematurely, the surviving spouse’s children—instead of the children from the first marriage—would get the IRA, which would have frustrated the parties’ intent.

Generally, the trust distributes to the surviving spouse the greater of the IRA’s internal trust accounting income or the required minimum distributions. Informing how to draft such a trust are some specialized rules:

• Prop. Reg. § 1.401(a)(9)-3(c)(5)(iii) allows the surviving spouse to elect not to apply the 10-year rule if the plan so permits, even though the trustee has plenary control over the Benefits. If available, this election can be made by December 31 of the year following the year of the decedent’s death, which deadline makes these issues tricky, given that September 30 of that year generally is the deadline for finalizing the trust’s characteristics that determine the distribution paradigm.
• Starting in 2024, Code § 401(a)(9)(B)(iv) allows the surviving spouse to elect to use the Uniform Lifetime Table (on or after January 1, 2022) instead of the recalculated Single Life Table (on or after January 1, 2022).

The surviving spouse may need inducements to (or consequences not to) take steps to lock in a longer (or not shorter) life expectancy. Trust agreements should authorize the trustee to distribute principal for support and welfare. Those distributions can ignore the surviving spouse’s other assets or require the surviving spouse to use such assets.

One is  unlikely to want to draft a trust for an IRA for a surviving spouse’s that is not a conduit trust, because the IRA deferral period will be shortened significantly. But what if the surviving spouse elects to use the 10-year period? The document includes authority to modify the trust to remove the conduit feature, so that the trustee can accumulate principal distributed from the IRA if the surviving spouse elects to shorten the distribution period to 10 years.

Saving Income Tax

Moving away from a conduit trust and to an accumulation trust, trusts quickly get into the top federal income tax bracket, and IRA distributions are subject to ordinary income (but not net investment income) tax.  Below is a way to accumulate IRA distributions in trust while taxing the beneficiary.

Distributions carry out DNI to beneficiaries when paid, credited, or required to be distributed.  A distribution is “credited” when the trustee exercises discretion and makes an amount available on a beneficiary’s demand. For example, the trustee determines that a $100K distribution would be appropriate for the beneficiary’s 2023 support. Instead of distributing that amount, the trustee communicates this determination to the beneficiary, who is informed that $100K may be withdrawn from the trust merely by demanding that the trustee make the distribution. Although not technically required, to track the withdrawable portion, I would suggest that the trustee distribute the $100K to a separate brokerage account labelled the BDOT (beneficiary deemed-owned) account.

The author is unaware of any guidance regarding whether the withdrawal right can be designed to lapse.  My best guess is that giving the beneficiary an unrestricted right, during the year of crediting and the next full taxable year, should suffice. For a 2023 crediting, the withdrawal right would be unrestricted for all of 2023 from the time the trustee communicated the crediting and also unrestricted for all of 2023.  So, the first restriction I might allow would start January 1, 2025.

In my example, in 2023, a $100K distribution would be treated as having been made. In 2024, all of the activity in the BDOT account would be withdrawable by and taxable to the beneficiary as the deemed owner. Starting January 1, 2025, the trustee could use all of the trust’s assets to satisfy the withdrawal right, which would annually lapse to the extent of 5% of the trust’s assets. This is the same theory—from income, gift, and estate tax perspectives—behind a lapsing hanging Crummey power.

The portion that is withdrawable is subject to the beneficiary’s creditors and includible in the beneficiary’s estate. If the trustee wants to make the withdrawable portion of the lapsing hanging Crummey power protected from the beneficiary’s creditors, but not cause a completed gift, the document creating the crediting mechanism may require the consent of a trustee who is a nonadverse party. In my example, this restriction would be added January 1, 2025, with respect to a 2023 credited amount.

Steven B. Gorin, CPA, Esq., CGMA, is a partner in Thompson Coburn LLP. He is a past Regent and past chair of the Employee Benefits Committee of the American College of Trust & Estate Counsel and former chair of the Business Planning Group of Committees of the American Bar Association’s Real Property, Trust Estate Law Section. He is a member of the National Association of Estate Planners and Council (NAEPC) Estate Planning Hall of Fame.

For more information about the author, please visit  http://www.thompsoncoburn.com/people/steve-gorin and https://www.thompsoncoburn.com/insights/blogs/business-succession-solutions/about.